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The Impact of EMU on Inflation Expectations

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  • Heinemann, Friedrich
  • Ullrich, Katrin

Abstract

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB in 1999 on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation, inflation expectations and forecast errors. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. Data on inflation expectations originate from the ZEW Financial Market Survey. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the anti-inflationary credibility of both central banks is not perceived to differ significantly. However, the analysis also reveals that the years immediately before the start of EMU were characterised by a relatively large degree of uncertainty: in this time, market participants resorted to backward-looking expectations even more than usually. This is a plausible result because of the intitial uncertainty about the new central bank?s characteristics. Once in charge of monetary policy the ECB was quickly successful to restore certainty about its true Bundesbank-like type.

Suggested Citation

  • Heinemann, Friedrich & Ullrich, Katrin, 2004. "The Impact of EMU on Inflation Expectations," ZEW Discussion Papers 04-01, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:1601
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    References listed on IDEAS

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    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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    9. Ullrich, Katrin, 2003. "A Comparison Between the Fed and the ECB: Taylor Rules," ZEW Discussion Papers 03-19, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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    Citations

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    Cited by:

    1. Breitung Jörg, 2008. "Assessing the Rationality of Survey Expectations: The Probability Approach," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 228(5-6), pages 630-643, October.
    2. Ullrich, Katrin, 2008. "Inflation expectations of experts and ECB communication," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 93-108, March.
    3. Prat, Georges & Uctum, Remzi, 2011. "Modelling oil price expectations: Evidence from survey data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 236-247, June.
    4. Georges Prat & Remzi Uctum, 2016. "Do markets learn to rationally expect US interest rates? Evidence from survey data," Post-Print hal-01411824, HAL.
    5. repec:eee:ecmode:v:72:y:2018:i:c:p:132-139 is not listed on IDEAS
    6. Guglielmo maria Coporale & Alexandros Kontonikas, 2006. "The EURO and Inflation Uncertainty In The EMU," Working Papers 2005_13, Business School - Economics, University of Glasgow.
    7. Svatopluk Kapounek & Lubor Lacina, 2011. "Inflation Perceptions and Anticipations in the Old Eurozone Member States," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 120-139.
    8. Tomasz Łyziak & Maritta Paloviita, 2017. "Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters," NBP Working Papers 261, Narodowy Bank Polski, Economic Research Department.
    9. Hernando Vargas-Herrera, 2016. "Inflation expectations and a model-based core inflation measure in Colombia," BIS Papers chapters,in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 123-151 Bank for International Settlements.
    10. Caporale, Guglielmo Maria & Kontonikas, Alexandros, 2009. "The Euro and inflation uncertainty in the European Monetary Union," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 954-971, October.
    11. Tomasz Lyziak, 2014. "Inflation expectations in Poland, 2001–2013. Measurement and macroeconomic testing," NBP Working Papers 178, Narodowy Bank Polski, Economic Research Department.
    12. Carlos Huertas Campos & Eliana González Molano & Cristhian Ruiz Cardozo, 2015. "La formación de expectativas de inflación en Colombia," BORRADORES DE ECONOMIA 012699, BANCO DE LA REPÚBLICA.
    13. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," CESifo Working Paper Series 2251, CESifo Group Munich.
    14. Łyziak, Tomasz & Paloviita, Maritta, 2017. "Formation of inflation expectations in turbulent times : Can ECB manage inflation expectations of professional forecasters?," Research Discussion Papers 13/2017, Bank of Finland.

    More about this item

    Keywords

    inflation expectations; credibility; ZEW Financial market survey; ECB; EMU; Carlson-Parkin;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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